Bank of Japan Keeps Rate at 0.5%

The Bank of Japan kept interest rates unchanged after a global credit rout clouded the outlook for growth in the world's second-largest economy.

Governor Toshihiko Fukui and his policy colleagues voted 8-1 to hold the key overnight lending rate at 0.5 percent, the central bank said in Tokyo today. The decision was predicted by economists. Board member Atsushi Mizuno, who proposed a rate increase in July, dissented.

Central banks in Japan, the U.S. and Europe injected more than $350 billion into the banking system this month after credit dried up following the collapse of the U.S. subprime mortgage market. Fukui, who has warned that leaving rates low could fuel risky investments and asset bubbles, may resume his policy of gradually increasing borrowing costs later this year.

``Recent financial market turmoil is unlikely to have altered the Bank of Japan's view that the economic case for another rate rise has been made,'' said Ben Eldred, an economist at Daiwa Securities SMBC Europe Ltd. in London. ``Monetary policy remains extremely accommodative.''

Investors see a 39 percent chance of a September rate increase, according to Credit Suisse Group calculations based on interest payments.

Japan's key lending rate is the lowest among industrialized economies. Fukui, who will hold a news conference at 3:30 p.m. in Tokyo, has said the bank needs to normalize policy now that the economy has overcome 15 years of stagnation that followed the bursting of a stock and property bubble in the early 1990s.

Bloomberg8/23/2007 6:28:47 AM

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